In many cases, married couples opt to open a joint bank account. However, joint accounts are not only for those who are married. Civil partners, unmarried couples, parents and their children, seniors and their caregivers and roommates are all examples of multiple individuals who may open a joint bank account together.
This begs the question: What happens to a joint account should one of the owners pass away?
How Does a Joint Bank Account Work?
Simply put, a joint bank account is one in which multiple people have access to the account, and therefore, the money held in the account. As mentioned above, while many married couples choose to open a joint bank account together, marriage is not a requirement to open an account. In fact, joint accounts can have more than two owners, depending on the specific bank you are opening the account with.
Why Would You Open a Joint Bank Account?
There are numerous benefits to opening a joint bank account. Many people opt to open a joint bank account for estate planning purposes, as joint accounts can make paying off the deceased owner’s bills easier. Some of the benefits of opening a joint account include:
- Simplifying the payment of bills
- Keeping track of spending
- Promoting trust between the account owners
- Potentially avoiding probate
Simplifying the Payment of Bills
For those who are splitting up the payment of bills, having a joint bank account can make the process easier. There is no need to transfer money between people, as all parties are owners of the account.
Keeping Track of Spending
For those looking to keep track of spending, having a joint account comes with the benefit of easy access – as all owners of the account can be in the know with regard to spending.
Promoting Trust Between the Account Owners
Having a joint bank account can encourage financial transparency, whether that is between spouses, parents and their children or any other group of individuals who own the joint account.
Potentially Avoiding Probate
In the majority of cases, when one of the owners of a joint account passes away, ownership automatically passes on to the surviving member (or members). Because of this, joint accounts typically avoid the extensive probate process that other accounts can be subject to.
What Are Some Disadvantages to a Joint Bank Account?
While there are some advantages to joint bank accounts, there are some disadvantages also as it relates to estate planning. The following are some disadvantages of joint bank accounts:
- May be subject to estate taxes
- No control over withdrawals
- May be impacted by lawsuits
- Potentially excluding beneficiaries
May be Subject to Estate Taxes
Depending on which state you live in, your joint bank account may be subject to both federal and state estate taxes if the total value of the gross estate of the deceased owner is above federal or state exemptions.
No Control over Withdrawals
Because the account is jointly owned, one owner alone cannot control any withdrawals from the account.
May Be Impacted by Lawsuits
If one of the other owner’s of the joint account gets sued, your funds may end up being collected as damages.
Potentially Excluding Beneficiaries
If, say, you jointly own a bank account with just one of your children, only that child will inherit the account when you pass away.
When is a Joint Bank Account Subject to Probate?
A joint bank account can avoid probate so long as the account was set up with rights of survivorship. On the other hand, if the account was set up with the owners as tenants in common, the deceased owner’s share of the account will be subject to probate.
Rights of Survivorship: What to Know
While joint bank accounts often have automatic rights of survivorship (assets transferred to the surviving account owner/owners upon the death of one owner), it is very important to double check with your bank that your joint account is set up this way.
What Are Alternatives to Joint Bank Accounts?
Two alternatives to joint bank accounts are Financial Power of Attorney and Living Trusts. If you name someone as your Financial Power of Attorney, this individual will take control of your finances should you become no longer able to do so on your own. Alternatively, by putting your bank account in a Living Trust, a trustee manages the assets in the account for the benefit of your beneficiaries. Putting your bank account in a Living Trust will also avoid the probate process.
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